One of the standard questions I ask clients seeking advice on what to do with a distressed property encumbered by a loan is whether they have any other loans with the lender on their property. The reason for this question is that many loan agreements have what are referred to as a cross default clause. A cross default clause provides that a default under one loan agreement with a lender is a default under any other loan with a lender.
A recent example of such a clause occurred with a loan provided by a local credit union. When the borrower defaulted under a HELOC loan against its residence, the lender sent out the repo man to repossess the borrowers vehicle — despite the borrower being current on the car loan and the car being upside down (loan balance compared to current value). The car loan agreement had a clause that provided that the car was collateral for any other loan made by the lender. Even though the car didn’t put the lender in any better position in terms of loss severity on the HELOC, the lender wanted the borrower off its books and wanted it back.
Fortunately, the borrower got lucky and talked the repo man out of taking the car and I was able to intervene quickly with lender’s counsel and work a settlement on the HELOC that included the lender’s agreement to let the borrower keep the car as long as the car payments were kept current. However, the lesson should be loud and clear to borrowers — know what other agreements you have with your lender/servicer and understand the risk of defaulting under a home loan. Consider a borrower who has a HELOC with a lender and also banks with the same lender. Most deposit agreements provide that if the borrower is in default under any loan with the bank, the bank has a right of offset against all deposit accounts of the borrower. I’ve seen a bank reach into a borrower’s account and withdraw funds when the borrower defaulted on a HELOC with the lender — even though the HELOC was a purchase money loan and covered by Arizona’sw anti-deficiency statutes. Needless to say, the borrower was both shocked and upset to learn what had happened and wanted his money back. However, fighting a bank over a $1,000 is not necessarily a winning proposition when you consider the legal fees involved to do so.
Similarly, some loans contain clauses that provide that a default under ANY loan agreement with ANY lender is a default under the other loan. This could result in a situation where a lender calls a loan that is paid current. Given these issues, I encourage borrowers to review all loan agreements and understand the potential risks of defaulting under a home loan. While Arizona’s anti-deficiency laws are quite broad, a default under a home loan can have other consequences that should be consisdered before the decision to default is made.
Marc McCain, Esq.
McCain & Bursh, PLC, Attorneys at Law
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